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There are three ways to buy a car. You can finance it by taking out a car
loan or a car lease. You can also pay cash. If you are one of the lucky few
who can afford to buy a car outright, consider providing car credit or
otherwise to the rest of us. If not, read on for some helpful advice.
Credit: Auto Loans
Car loans account for about 75% of car credit. Therefore, for the majority
of car buyers in the US car credit (or car finance) really means shopping
for a suitable car loan. The vast majority of car loans are originated in
the F&I (Finance & Insurance) office with close to 80% of cars sold being
financed in Franchise and Independent dealerships across the country.
Although you can take out a bank car loan to finance your car in advance
of car shopping, many people like the convenience of getting a dealer car
loan. They can walk in, choose a car, fill out a car credit application
and drive away in a new car. They can do this at night or on the weekends
when banks and credit unions are closed.
How long should I expect to spend in the car dealership?
While you should visit more than one dealership, when it comes time to buy
most people spend a little over two hours in the car dealership. About 40%
of this time (50 minutes) is spent in the car showroom. Another 40% is spent
in the sales negotiating purchase price, qualifying one's car credit,
reviewing car loan terms, etc. Finally, expect to spend about 20% of
the time (25 minutes) in the F&I office. Want to expedite your dealership visit, consider applying for auto credit in advance.
So how important is car credit to the dealership?
Surprisingly, the most sophisticated dealers have made less money on
the car for each of the last 10 years. In fact, profits from new and
used car sales have declined every year since 1995. What have they
been replaced by? Car credit and other services sold through the F&I
office and Service & Parts sold through the service bays. Revenues
for these two categories have increase every year since 1995 with
F&I being the more important.
Almost half of a dealership's income is generated from the sale of
car credit and related products. Not surprisingly time spend in the
F&I office has increased for the average car buyer from about 20
minutes in 2000 to about 30 minutes in 2005. Why? While there are
more forms and disclosures required, the primary reason is that
dealers are selling more F&I-related products. As for what type
of products are on sale:
- Finance. 75-80% of consumers finance their auto purchase. As you
might expect given the lower sticker price, consumers finance 73%
of used car purchases while financing 80% of new car purchases. Know you're getting a great rate by comparing car loan quotes.
- Extended Service Contracts. Fully 30-40% of consumers elect to purchase an extended service contract. Not surprisingly the numbers are highest for purchasers of use cars.
- Guaranteed Asset Protection (GAP). 30-40% of consumers opt for GAP
coverage. GAP insures the difference between the outstanding loan
amount and the amount of insurance to be recovered in the event of
a total loss.
- Environmental products. New car franchise offering with an almost
1/3 accept rate.
- Prepaid Maintenance Programs. Between 20 and 30% of consumers opt
in for pre-paid maintenance most often provided by the selling dealership.
- Theft Deterrent Systems. About ? of new car buyers opt for these
systems.
- Lease. About 20% of consumers opt to lease their car. Leases are
predominantly used for new cars.
- Credit Life / A&H Insurance. Under 10% of consumers opt for this
additional, discretionary insurance coverage.
How much does the dealer make on these credit products?
While it varies considerably by type of dealership (new vs. used),
a dealer makes about $500 on the average car sold, about $700 on
the average car loan he originates, about $400 on the average
service contract, about $300 on the average GAP contract. The dealer mark-up on bad credit car loans.
About these numbers: Some people believe that any profit the dealer
makes is a loss to them. This is a bit shortsighted as dealers and
their salespeople are generally hardworking people like you and me.
Further, a dealership represents a huge investment in inventory,
equipment, land and personnel / training. Dealers are entitled to
make a fair return on that investment. We provide you these numbers
solely so that you may be able to spot the situations where the dealer or salesperson is attempting to make an unfair return.
Credit: Auto Leases
An car lease resembles a car loan in a lot of ways. As with a
loan, you will need to complete a credit application. Like car
credit applications, lease applications are routed to car
finance companies who will decide whether or not to lend to
you based on your credit score, the lease amount and the
lease duration.
Like a car loan you will be asked to put some money down in
the form of a down payment. Unlike a car loan, with a lease
your objective is to minimize the amount of out of pocket.
Car leases also come with mileage caps. While most contracts
allow you to put 12,000 miles on the car per year, some leases
have 10,000 mile caps. To increase the cap you will need to pay
more each month as you are compensating the lessor for the car's
depreciation.
Leases contain a "residual value". This is the expected value of
the vehicle given normal wear and tear at the end of the lease
period. You can buy the car for the “residual value” at the end
of the lease term. Or, if you're not interested, you can turn
it back over. Make sure to review the fees associated with turning
in a leased car as there are often charges for excessive wear
and tear. Also, it's important to note that leases are available on new cars. You'll need a loan to finance your used car.
Related Links
Disclosure: We developed the content for SmartCarCredit™ while working with automotive industry clients. We hope you find it helpful in making informed decisions. While we believe the information to be accurate, we do not guarantee its accuracy.
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